Lease Data Validation Steps for FASB/IFRS Accounting & Reporting

For FASB & IFRS accounting, your ultimate goal is passing audits with complete and accurate balance sheets and journal entries. That’s why your process for getting compliant with the FASB or IFRS new lease standard must include data validation.

Under the IFRS and FASB new lease accounting rules, you now need to track and report on many types of leases that you didn’t have to worry about previously because they were off the balance sheet. So you’ll need new processes for gathering data points and verifying that you have the accurate information needed to produce the required calculations, reports and journal entries.

Here’s some advice about how to streamline that process so you don’t slow down your implementation or miss your deadlines.

What is valid lease data for IFRS and FASB accounting?

There are two issues when it comes to validating lease data for your IFRS and FASB accounting: completeness and accuracy.

COMPLETENESS:
Your data collection and validation process must accomplish the following to ensure you have all the data to produce calculations and generate reports for IFRS and FASB accounting:

Aggregate all relevant lease dates and payment information. You won’t be able to base your reporting on a snapshot of a month’s lease payments. You need a complete picture of the total lease expense, including records of every payment that has been made and projections for every payment that must be made over the course of the lease term.

For each lease, you must be able to answer these questions in order to classify it as a capital lease or operating lease:

Does the lease transfer ownership of the underlying asset to the lessee by the end of the lease term?

Does the lease grant the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise?

Is the lease term for the major part of the remaining economic life of the underlying asset, unless the commencement date of the lease falls at or near the end of the economic life of the underlying asset?

Does the present value of the sum of lease payments and any residual value guaranteed by the lessee not already reflected in lease payments equal or exceed substantially all of the fair value of the underlying asset?

Is the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term?

ACCURACY:
Especially for enterprise organizations, it’s common for the same lease data points to be stored in several different repositories (which may include spreadsheets). Your company may have systems for different purposes (facilities management or accounts payable, for example) or for different geographic regions.

As you begin to collect and aggregate all that data in preparation to comply with the new IFRS or FASB accounting rules, you may run into conflicting data and integrity issues.

5 steps to validate lease data for IFRS and FASB accounting

For the vast majority of companies, complying with the new IFRS and FASB accounting rules for leases will require investing in a lease accounting software.

Here’s how to go about scrubbing your data as part of the technology implementation process.

1. Make policy decisions up front.
Even before you begin collecting data for FASB and IFRS accounting, decide what you’ll do when you encounter data integrity issues. When there are multiple sources of data that conflict, which system will take precedence? Or will you go back to the source documents to validate? This strategy is highly recommended for the highest degree of assurance, but the process may take longer.

For global organizations that need to comply with the new IFRS accounting standard (IFRS 16), you’ll also need to decide how to deal with data in different languages and currencies. Will you abstract and store data in each native language? (If so, make sure you choose a lease accounting system with native language capabilities.) Or will you translate lease data first and then abstract and store data in your system in one language? That process can take longer and be more costly.

If you want to be able to report in multiple currencies and also roll up global data in US dollars, make sure your system has this capability.

2. Include the right resources.
It’s essential that you put together the right team to streamline your data collection and validation project for complying with the new FASB and IFRS accounting standards. You’ll need to include both the people who understand the numbers (your accounting staff) and the people who understand the leases (real estate lease administrators and other groups managing other leased assets). These are the people who will provide the data and help resolve any data quality issues.

As you pull together data from various repositories, spreadsheets and the lease documents themselves, use the lease abstracting process as an opportunity to compare data points from the sources of record to information pulled from other systems.

As you aggregate data from different sources, you’ll inevitably come across some conflicts. Now is the time to put your data validation policies into play and enlist your lease experts to track down the correct information.

5. Import and run reports to find and fill the holes.

At this point, you’re ready to import your data into your new lease accounting software.

TIME-SAVING TIP: The quickest and easiest way to find out what’s missing for complete FASB and IFRS accounting reports and journal entries is to use the reports in your new lease accounting software. Those reports can quickly and easily show you the holes in your data. Then you can turn to your lease experts to do the necessary detective work to collect the information you need.